What are paycards?

As an alternative to the costs and efforts associated with traditional paychecks, many American employers are discovering the value of paycards, that allow them to pay all employees - even those without bank accounts - electronically. Paycards, a growing trend in payroll management, are electronic cards that look similar to an ATM or credit card and are loaded with an employee's earned wages each payday. Because the earned wages are loaded onto the paycard electronically, employees have immediate access to their pay and do not have to jump through the hoops associated with cashing a traditional paycheck.

Paycard systems are offered by a variety of vendors and come in many forms. A paycard may operate as a stored-value card, with pay credits loaded electronically, or it may open an account to which the employee's wages are credited. Some paycards may be cashed for their full value at financial institutions, used at ATMs or for point-of-sale purchases. In addition, most paycard systems provide employees with the ability to make an Electronic Funds Transfer from the card to a bank account of their choice or to write checks drawn on the card.

For employers, paycard systems can dramatically lower payroll processing costs. These systems make the most sense for large companies with more than 1,000 employees, particularly those companies whose workforces are spread across several states or countries. The American Payroll Association estimates the costs of writing checks at $2-$10 per paycheck. Employers have been able to reduce as much as 85 percent of the costs associated with payroll through the conversion to a paycard system. Paycards encourage employees to utilize direct deposit for payment of wages. In addition, because the security features associated with ATM cards and credit cards are usually built into the paycard system, the risk of fraud found with paper paychecks is minimized or eliminated.

Look before you leap into any paycard program.

Just like traditional paychecks, paycards are governed by state wage payment laws and must comply with state requirements for the form and delivery of employee wages. These requirements vary from state to state. Wherever possible, employers should simply mandate direct deposit. However, many states prohibit mandatory direct deposit. For those states, employers should consider paycards. Similar to the prohibition against mandatory direct deposit, many states now have restrictions on the format and manner in which paycards can be used. These restrictions take many forms - from blanket prohibitions against paycards to mandating the manner in which funds are transferred.

Why electronic paystubs?

To reduce costs, an employer's goal is to eliminate all paper from the payroll process. This involves the use of electronic paystubs. Like paycards, state laws may impose requirements about the format of and information contained in employee wage statements. In some states, this means an electronic wage statement, sent via email or accessed on a secure server. Not all states allow such statements, however, and it is the employer's responsibility to make sure that any paycard system and paystub delivery complies with the laws of the states where it operates.

Although paycard systems provide many benefits for both employers and their employees, employers considering such a system should be aware of the pitfalls created by switching from a traditional payroll process to paycards, such as remaining in compliance on a state-by-state basis.

How to implement?

Employers interested in paycard program should find the paycard vendor that best meets their needs. There are many options in selecting the appropriate vendor. You need to decide whether you need a branded card bearing your company's logo and/or if you want the card to look like a typical credit card bearing (e.g.) a Mastercard or Visa logo. Some of these features will add expense to the paycard program depending on the vendor. Employers will also want to consider what access to funds the employees should have without a fee. Under all state laws, employees must be able to access the funds without a fee. However, if an employee chooses to use the paycard as a debit card multiple times within a single payroll cycle, the employee will generally incur fees. How many fees there are and how much those fees are vary by vendor.

In making the vendor selection, employers should engage their own counsel. All vendors will tell prospective clients that their paycard program complies with all laws. Employers should make sure that they have reviewed those laws themselves in an effort to ensure full compliance. If the paycard program is out of compliance, the employer, not the vendor, will be dealing with fines and penalties under the state law.

Program implementation steps.

Paperless pay projects have at least three distinct phases:

Phase 1. Identify the vendors to be considered for the project, design the paperless payroll system that the business wants each vendor to bid on, analyze the vendor proposals, and prepare the necessary agreements between the company and the vendor.

Phase 2. Review and update information on the applicable laws and regulations of each of the states in which the company intends to implement paperless pay and determine what, if any, legal impediments, or additional requirements, exist with the program proposed by the selected vendor.

Phase 3. Roll-out and implementation of paperless pay for the company. Appropriate communication to employees can alleviate any potential pitfalls.